Tax

A tax is an involuntary fee paid by individuals or businesses to a government, to support the operation of that government, or to otherwise achieve government goals (also called fiscal policy). Other purposes might include redistribution of income from the rich to the poor, or the support and maintenance of public works. Taxes are most often levied as a percentage, called the tax rate, of a certain value, the tax base (how much you have, earn, spend, inherit, etc.).

An important feature of tax systems is whether they are flat (the percentage does not depend on the base, hence the tax is proportional to how much you have), regressive (the more you have the lower the tax rate), or progressive (the more you have the higher the tax rate). Progressive taxes generally get a smaller percentage of the income of poorer people, and require less record-keeping and complexity by people with simpler affairs. Progressive taxes reduce the tax burden of people with smaller incomes.

Another idea is to arrange the taxation so that it causes minimal economic disruption, with the hope of maximizing the total efficiency of the economy, and thereby making everyone wealthier. The classic economically neutral tax is a tax on land. A government's primary duty is to maintain and defend title to land, and therefore (so the theory goes) it should collect most of its revenues for this unique service. Since governments also resolve commercial disputes, especially in countries with Common law, this doctrine is often used to justify a sales tax or VAT (Value Added Tax).

The most common tax is a direct tax. The best example of a direct tax is income tax, which is paid by individuals and corporations on their earnings. This is most often a progressive tax, because it increases more than proportional with for increasing income. Some critics characterize this tax as a form of punishment for economic productivity. These critics say it is socially intrusive because enforcement causes the government to collect large amounts of information about business affairs, much of which could be considered proprietary.

The crucial invention permitting the high income tax rates was direct withholding of taxes from payrolls by employers. Employees have no problem paying high taxes, because they never handle the money. This also discourages cheating, because there are fewer employers than employees, and the government can focus enforcement.

The classic way of cheating on income tax is to lie about one's affairs. Either one fails to declare income, or declares nonexistent expenses. The government fights this by looking at individual ratios using computer programs. For example, if a person spends too much on cars, they might be examined.

The collection of tax in order or to spend it on specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. The practice is often disliked by finance ministers, since it reduces their freedom of action.

Types of Taxes

A poll tax is a tax paid directly by an individual to a government. The earliest tax mentioned in the Bible of a half-shekel per annum from each adult Jew (Ex. 30:11-16) was a form of poll tax. Poll taxes are infamous for causing hardship for the numerous individuals that handle their affairs poorly. In fact, they were forbidden by the U.S. constitution, as a historic abuse to be prevented. This protection had to be changed in order to enable income taxes. Poll taxes are difficult to cheat.

Indirect taxes are hidden taxes. Value Added Taxes, when they do not appear on the sales receipt are a form of indirect tax.

Sales taxes on retail transactions may be applied as either direct or indirect taxes. Sales tax discourages retail sales. It is common to exempt food, heating and lighting costs from sales tax, to avoid regressive taxation on the poor. Sales tax directly discourages formation of efficient capital-intensive production because it taxes the purchase of factory equipment. The classic way of cheating on sales tax is to ask a merchant for a cash discount. The merchant pockets the cash and writes off the merchandise to shrinkage, and the state fails to get the tax.

An import or export tariff is a charge for the movement of goods through a political border.

Excise taxes discourage trade. Excises pay government to maintain a navy or border police, and also protect domestic industry to some extent. The classic cheat is smuggling, or a war to interfere with competing countries' merchants.

A value added tax (also called a goods and services tax) applies the equivalent of a sales tax to every operation that creates value. A VAT was historically used when a sales tax or excise tax was uncollectable. For example, a 30% sales tax is so often cheated that most of the retail economy will go off the books. VAT distributes such a tax in small enough increments that it becomes more trouble to cheat than to pay the tax. However, a VAT punishes production, which is considered a bad effect.

An inheritance tax is imposed in many countries on the estates of the deceased. Inheritance taxes are one of the few taxes that do not have any harmful effect on the economy. In fact, many economists consider them to be beneficial as they encourage consumer spending by the elderly. Inheritance taxes are extremely unpopular, however, and many countries such as Canada and the United States have gotten rid of theirs or are in the process of doing so.

A fuel excise is often used to pay for public transportation, especially roads and bridges and for the protection of the environment.

An alcohol excise is used to discourage alcohol consumption and to pay for the costs of treating illness caused by alcohol abuse.

A carbon tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel, jet fuels and natural gas. The object is to reduce the release of carbon into the atmosphere.

A History of Taxation

Political authority has been used to raise capital throughout history. In many pre-monetary societies, such as the Incan empire, taxes were owed in labor. King Solomon of the Old Testament pointed to the need for taxes to be applied for civil purposes (1 Kings 4:7; 9:15; 12:4), and these amounts were increased during times of foreign occupation.

In more sophisticated economies such as the Roman Empire, tax farming and feudalism developed, as the central powers could not practically enforce their tax policy across a wide realm. The tax farmers were obligated to raise large sums for the government, but were allowed to keep whatever else they raised. The early Christians of the New Testament including Jesus supported the payment of taxes. "Render unto Caesar the things that are Caesar's". It is even recognized as a duty whether as a "telos" on merchandise or travellers (Matt. 17:25), an annual "phoros" on property tax (Luke 20:22;23:2), a "kensos" or poll tax (Matt. 22:17; Mark 12:14, or the tribute money of a temple-tax (Matt. 17:24-27).

In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the tax on the creation of money. Seigniorage has been replaced by central banking.

Historical forms of taxation

scutage - paid in lieu of military service
tallage - a tax on feudal dependants
a tithe - a tax (one tenth of one's earnings or agricultural produce), paid to the Church

Some principalities taxed windows, doors or cabinets to reduce consumption of imported glass and hardware. Armoires, hutches and wardrobes were invented to evade taxes on doors and cabinets.